Module 13: full- information forecasting & valuation Company: chipotle

1. Module 13: full- information forecasting & valuationCompany: chipotle Matt Ramirez

2. Chipotle background • Mexican grill that focuses on serving quality food while maintaining speed and efficiency • Founded in 1993 by Steve Ells in Denver, Colorado • Considered a “fast-casual” restaurant: food that is served fast without the “fast food” methods or ambiance, allows customers to eat “on the go” or in a nicer restaurant environment • Not franchised, centrally-owned • Experiencing rapid growth recently and focused on national and international expansion

3. Epm forecast

7. Forecast assumptions • Food, Beverage, and Packaging: Largest EPAT expense- steadily rising and will continue to rise as Chipotle expands • Labor: Steadily declining, will continue to decline for a few years as sales increase but will reach steady state after growth slows • Other Operating Expenses: Unclear what is included, but 10-K states that they will grow as % of sales in future

8. Epm without full-information New EPM is lower than previous years: inclusion of ESO adjustment adds an additional expense that reduces profits

9. Eato forecast

15. Forecast assumptions • Leasehold Improvements & Buildings: Has been significantly declining as sales increase- trend will continue until sales slow • Equipment: No true trend- will hover around 7.5% or so • Operating Leases Adjustment: Most significant impact to Enterprise Assets- assumed steady impact yearly

17. Forecast assumptions • Accounts Payable: No true trend- 2% chosen as “midpoint” • Deferred Rent: slowly declining, but will likely slightly increase as expansion continues

18. Eato forecast EATO is significantly lower due to addition of Operating Leases: Inclusion of these assets shows that Chipotle is not utilizing its assets as efficiently as its financial statements lead to believe

19. Sales growth

20. Sales figures

21. Sales growth explanation • Chipotle expected to maintain a high growth rate for near future, but this growth % will steadily decline • 16.79% chosen as average of expected earnings and analysis from past trends, but will decline roughly 2.5% per year: level of growth is not sustainable (judging from past few years) • 4% continuing growth chosen as Chipotle’s rapid based on own and analyst estimates

22. Full-information forecasting & valuation

25. Comparison of captured value

26. Agr model used for valuation • While all 3 valuation models yield the same value, the AGR captures 91% of value within horizon • 91% of value is attributed to predicted 2014 EPAT & PV of AGR • Most comfortable with capturing value within horizon due to uncertainty of Chipotle’s future and rapid growth

27. DCF, REI, Agr values

28. Recommendation & final comments

29. Value adjustment

30. Recommendation = Sell Chipotle’s market price is 3.85 times larger than calculated value

31. Sensitivity analysis

32. Analysis of recommendation • Chipotle is significantly over-valued by the market: what is this value attributed to? • Judging from the sensitivity analysis, even significant changes in the valuation models yield a lower value than the market • Certain adjustments had significant impacts on valuation: Operating Leases greatly impacted NEA and therefore FCF, leading to lower value

33. Final comments • Expectation of future payoffs are lower than the markets or expected risk of Chipotle is higher than the markets: Chipotle’s current growth is not sustainable and will eventually slow down • Is market aware of “off-balance sheet” items (Operating Leases/ESO’s)? Or are they ignoring it? • One thing is clear: Chipotle is clearly over-valued by the market and its momentum will likely slow down within the next few years